The conservative contends that socialism doesn’t work. It fails to provide for our material needs and desires as well as capitalism can. But why doesn’t socialism work? Let’s examine some of the weaknesses in socialism’s efficacy.
Incentives vs. Intentions
We are not born into a world of limitless abundance, but a world of scarcity and latent provisions. Scarcity is the fundamental problem of economics: our resources are quite limited while our needs and desires are seemingly limitless. How then do we best manage the limited resources we have? Certainly, the distribution of resources is an important consideration. But if humanity were reliant only on the distribution of the things the earth provided naturally, most of us would die of starvation.
“The root of all socialist economics is the separation of the distribution of wealth from the production of wealth,” wrote Irving Kristol. “Socialist economics assumes that there is no problem of production, only a problem of distribution.” But the problem of production and the problem of distribution cannot be separated. They are joined by incentives that induce human behavior. And it is incentives that compel the transformation of the raw materials the earth provides into the abundance we hope to enjoy. Distribution cannot generate this wealth—it can only allocate the resources our earth and our productivity has provided.
How do we best maximize these provisions? By matching their profits directly to those who are responsible for generating them. It would be ideal if those who were capable of this willingly shared their production with those who were most in need. But then, so would a world in which humans were incapable of malice, greed, corruption, and division. “Economic policies need to be analyzed in terms of the incentives they create, rather than the hopes that inspired them,” cautioned Thomas Sowell. When we craft our economics around how we would like for people to behave, rather than how they are incentivized to behave, we are crafting an economic system that only works in the imagination.
And while generosity is a character trait that any virtuous society will encourage, it is hardly sufficient for dealing with the very real problem that there simply isn’t enough stuff to distribute around in a manner that we’d find agreeable, let alone in a manner that would stave off rampant starvation. But an interesting phenomenon occurs when we allow those who are responsible for producing wealth to enjoy the fruit of their labor: they end up being generous with their wealth even when they had every intention of being selfish.
“People tend to do more for their own benefit than for the benefit of others,” Sowell says, stating the obvious. What’s not so obvious, however, is that “freely fluctuating prices can make that turn out to be beneficial to others.” As we explored in Part 3, a freely fluctuating price contains invaluable information about the unseen and often unknowable costs of a good or service. When each individual participates in the long and complex process of production in a manner that’s beneficial to them, they inadvertently end up benefiting everyone else involved. “The morals of the market do lead us to benefit others, not by our intending to do so, but by making us act in a manner which, nonetheless, will have just that effect”—echoes economist F. A. Hayek–“In a way that good intentions alone cannot do—and thereby does make our efforts altruistic in their effects.”
The Incomprehensible Complexity of the Free Market
We’ve examined the important role price plays in all this talk about economic efficiency and unintended generosity, but it would be difficult to overstate the importance of the information conveyed in price and how it works to our benefit. In fact, I’d go so far as to say I don’t know that humans are capable of comprehending the extent to which this is true, in the same sense our brains can comprehend the fact that there are fifty stars on the American flag but not that there are 100 billion stars in the Milky Way. Nevertheless, some illustrations may suffice to get the point across.
The YouTuber How To Make Everything demonstrates the importance of the free exchange between individuals by showing what it would be like to try to make things on one’s own. As such, there are videos ranging from how to make a T-shirt for only $5,000 in only three years to how to make a sandwich for only $1,500 in only six months! Thankfully, the complexities of modern society, which includes a highly efficient division of labor and distribution of goods, make these otherwise impossible tasks quite affordable. I may not know how to grow the cotton that goes into my t-shirts or the wheat that goes into my bread, but I do know how to make a living as an auditor, and I can take my earnings from the profession I specialize in and use them to pay the people who do know how to do these things so that I can wear t-shirts and eat sandwiches as I please.
But there’s another, infinitely more complex, component of the free market at work here. For it’s one thing to observe the benefits in the division of labor—benefits both capitalists and socialists are likely to find equally agreeable—but it’s quite another to then claim we understand how to direct this division of labor.
Just how is it that the person who grows the cotton or the farmer who harvests the wheat knows what to do with their tiny slice of the production process? How do they know how much to grow, who to send it to, and what price to charge such that I can walk into a retailer or restaurant and purchase these items at an affordable price? For that matter, how is it the complex web of individuals responsible for every level of the production process—from raw material to the finished product finding its way on a store shelf—each seem to know exactly how to play their part such that everything comes together at the right quantities and prices to keep store shelves adequately stocked with merchandize? Who is directing all this?!
I, Pencil
Leonard E. Read’s essay, I, Pencil, written over six decades ago, still provides the clearest explanation for this mystifying process I’ve ever encountered. The essay depicts a pencil sharing its origin story with the reader, which includes some a rather audacious claims:
“I am a lead pencil—the ordinary wooden pencil familiar to all boys and girls and adults who can read and write…You may wonder why I should write a genealogy. Well, to begin with, my story is interesting. And, next, I am a mystery—more so than a tree or a sunset or even a flash of lightning…I, Pencil, simple though I appear to be, merit your wonder and awe, a claim I shall attempt to prove. In fact, if you can understand me—no, that’s too much to ask of anyone—if you can become aware of the miraculousness which I symbolize, you can help save the freedom mankind is so unhappily losing. I have a profound lesson to teach. And I can teach this lesson better than can an automobile or an airplane or a mechanical dishwasher because—well, because I am seemingly so simple.
Simple? Yet, not a single person on the face of this earth knows how to make me.”
What follows this rather bold assertion are “innumerable antecedents” that describe the fascinating process of producing just one pencil, which involves raw materials from a multitude of places all over the earth and a seemingly endless stream of occupations involved in each step along the way. After this dizzying description the pencil asks, “Does anyone wish to challenge my earlier assertion that no single person on the face of this earth knows how to make me?” Indeed, it is evident no individual possesses the knowledge, resources, and equipment needed to produce the deceptively complicated pencil.
We are left with a rather startingly realization: if no individual knows how to make a pencil, how do pencils ever get made? Surely someone must be in charge of the production, orchestrating things from beginning to end! Not so, says our friend the pencil:
“I, Pencil, am a complex combination of miracles: a tree, zinc, copper, graphite, and so on. But to these miracles which manifest themselves in Nature an even more extraordinary miracle has been added: the configuration of creative human energies—millions of tiny know-hows configurating naturally and spontaneously in response to human necessity and desire and in the absence of any human masterminding! Since only God can make a tree, I insist that only God could make me. Man can no more direct these millions of know-hows to bring me into being than he can put molecules together to create a tree.”
Where’s the Master Mind?
Invoking God the creator here seems apropos. To the skeptically minded, the mysterious ability of the free market to somehow direct individuals—each of whom do not understand how to fully produce something like a pencil from beginning to end—to act in such a way that pencils are actually produced when no master mind is involved in the process seems…incredible at best and perhaps unbelievable. “Just as primitive peoples tended to attribute such things as the swaying of trees in the wind to some intentional action by an invisible spirit, rather than to such systemic causes as variations in atmospheric pressure,” explains Sowell, “so there is a tendency toward intentional explanations of systemic events in the economy, when people are unaware of basic economic principles.”
Yet it is precisely the information that gets conveyed in the freely fluctuating price that directs everyone to play their role perfectly such that pencils are manufactured and store shelves are adequately stocked. “To the naïve mind that can conceive of order only as the product of deliberate arrangement, it may seem absurd that in complex conditions order, and adaptation to the unknown, can be achieved more effectively by decentralizing decisions, and that a division of authority will actually extend the possibility of overall order,” adds Hayek, “Yet that decentralization actually leads to more information being taken into account.”
No one master mind is directing this process. No central committee of hyper-intelligent bureaucrats was in constant communication with each individual involved in each step of the process such that the store you just happened to walk into on a Tuesday evening after work would have a decent selection of pencils to choose from at prices you were willing to pay. To even imagine the cartoonish absurdity that would be involved in directing market forces on how best to meet the public’s demand for something as “simple” as a pencil is dizzying. No wonder political writer Lord Acton warned that centralization of economics means “apoplexy at the center and paralysis at the circumference.”
In lieu of an intelligent master mind with general knowledge directing the entire process, the free market instead relies upon the highly specific knowledge of each individual involved. For each individual involved in the production of something like pencils couldn’t possible understand how to direct the entire process, but they do understand how to play their part. “Specific knowledge is one of the scarcest of all resources,” contends Sowell, “regardless of how many people there may be who can talk in glib generalities. The net result of all this is that even countries which have long been food exporters often begin to have difficulty feeding themselves after the government has taken control of agriculture.”
Unintended Generosity and Generosity as a Virtue
All of this leads us back to the wild assertion that a system which relies upon the incentives inherent in each individual acting out of their own best interests somehow leads to unintentional generosity. As Hayek explains:
“In our economic activities we do not know the needs which we satisfy nor the sources of the things which we get. Almost all of us serve people whom we do not know, and even of whose existence we are ignorant; and we in turn constantly live on the services of other people of whom we know nothing. All this is possible because we stand in a great framework of institutions and traditions—economic, legal, and moral—into which we fit ourselves by obeying certain rules of conduct that we never made, and which we have never understood in the sense in which we understand how the things that we manufacture function.”
We’ll turn to Hayek’s idea of “rules of conduct” in a moment. But I do not want to confuse this unintended or accidental generosity with the actual virtue of generosity. Nor do I mean to imply that virtue is incidental to a functioning economy. On the contrary, it is absolutely essential. It was the philosopher and economist Adam Smith who first popularized the most self-evident aspect of economics: human behavior can often be explained as the rational pursuit of self-interest. But Smith was not saying we should only pursue what we believed to be in our self-interest. Irving Kristol, in surveying Smith’s work, wrote that Smith “assumed and asserted that there were natural and self-correcting limits to the pursuit of self-interest”. As such, Smith’s ideal world was not “liberated from the traditional moral virtues but was, in its own way, still rooted in them.”
Let’s think back to Kristol’s observations about the distribution of wealth. When it comes to distributing the wealth generated by producers we have three broad options: 1) individuals can be incentivized to produce by taking ownership of what they have produced (capitalism), 2) the government or community or some form of collective can distribute what has been produced on a basis they deem to be just and equitable (socialism), or 3) those who are strong simply take from those who are weak.
This third option was—sadly—precisely how most of the world prior to capitalism operated and far too much of the world still operates. Journalist and author Jonah Goldberg often illustrates this point by imagining how he might get an apple from you. There’s the simple, if somewhat primitive, method—“I hit you with a rock and take your apple. There is one apple-eating winner and there is one apple-less loser with a lump on his head.” But then there’s the method that’s far more mutually beneficial: trade. “Because the apple buyer needs an apple and the apple seller needs the buyer’s money for something else. Trade builds trust and encourages strangers to see each other as equals in a transaction.”
Them’s the Rules
“To operate beneficially, competition requires that those involved observe rules rather than resort to physical force,” argues F. A. Hayek. And just how did civilization manage to move from bashing each other over the head with rocks to get what they want to observing the sort of “rules” necessary for the complex trade relationships we witness in the free market today? Is it because we’re just better than the people who lived long ago? Don’t flatter yourself. To the extent we are more virtuous—that is, more civilized—it has nothing to do with some make-believe superiority we have over our ancestors. Humans are, after all, all the same carbon-based life forms capable of both nobility and savagery. Our superior virtues are not due to a superior nature but are instead the product of both religious and cultural tradition.
Precisely how tradition infused humanity with the sort of rules of fair play that allows for the free market to function is a lengthy subject for another day. What’s important for our purposes here, is that these rules and especially our willingness to observe these rules is not something that comes naturally to humans. It takes something like tradition to enforce a set of values upon us that we would not otherwise observe. And this distinction is important, for it tells us a great deal about the limitations of humans to devise an economic system that doesn’t evolve within our religious and cultural traditions.
Socialism is the attempt to circumvent this evolutionary process of rules based on tradition and instead to impose a set of values we have created and deemed worthwhile. This is evident in the moralistic tone socialist critics of capitalism often take. We are told that capitalism represents greed, that it is unfair in that it produces inequities. We are assured that it was built upon a repressive system of the strong taking from the weak (imperialists vs. the conquered, the patriarchy vs. feminism, white European males vs. minorities, slave owners vs. slave, the bourgeoisie vs. the proletariat, and so on). Socialists are interested in correcting this sad history of oppression and erecting in its place a new economic order operating on the values of justice, equality, and the recognition of positive rights to things like healthcare, housing, food, and education.
But are humans capable of swapping out our traditional moral order for updated alternatives? “Our moral traditions, like many other aspects of our culture, developed concurrently with our reason, not as its product,” continues Hayek. The hubris of social planners teach that we can utilize our reason to develop an economic system outside of the free exchange between individuals that’s just, equitable, and virtuous. But that is not how human behavior develops:
"Learning how to behave is more the source than the result of insight, reason, and understanding. Man is not born wise, rational, and good, but has to be taught to become so. It is not our intellect that created our morals; rather, human interactions governed by our morals make possible the growth of reason and those capabilities associated with it. Man became intelligent because there was tradition—that which lies between instinct and reason—for him to learn.”
Shorn of our traditions, humanity is not apt to behave in the moral sense socialists have in mind. For it is precisely because of our traditions that we have managed to claw our way out of the system where Jonah Goldberg has to bash you over the head with a rock to get your apple to a system where you each have been conditioned—by tradition—to follow the sort of “rules” that make mutually beneficial free trade possible.
The Temptation to Extend the Extended Order
The temptation and folly of socialism is to take something that is good at one level—the distribution of things such that no one lacks—and to scale it up to the point it is no longer feasible. This is the distinction Hayek makes between what he calls the “local order” and the “extended order”. The local order can only be experienced between you and those who are closest to you. The extended order includes everyone outside of that bubble. And it is tradition that helps us decipher what “rules” we are to follow in the context of each group. As Hayek explains:
“Part of our present difficulty is that we must constantly adjust our lives, our thoughts, and our emotions, in order to live simultaneously within different kinds of orders according to different rules. If we were to apply the unmodified, uncurbed, rules of the micro-cosmos (i.e., of the small band or troop, or of, say, our families) to the macro-cosmos (our wider civilization), as our instincts and sentimental yearning often make us wish to do, we would destroy it. Yet if we were always to apply the rules of the extended order to our more intimate groupings, we would crush them.”
Jonah Goldberg is also fond of explaining how, in the Goldberg household, he practices Marxism: From each according to his ability, to each according to his needs. He does not expect his daughter to contribute equally to the family’s finances. Nor does he have any qualms about limiting her freedom proportional to her maturity. In the “local order” these are good and desirable virtues. But applied to the “extended order” they become the tools of tyrants.
But what affection, what love, what acceptance is found in the group Hayek so superficially refers to as the “local order”! Wouldn’t it be nice IF we could—if you’ll pardon the pun—extend the local order into the extended order?
This desire—this longing for the extension of community—is precisely what makes socialism so appealing. In the end, no economic argument will dispel the appeal of socialism because socialism represents far more than an economic system. And this is precisely where we’ll turn in the fifth and final part of this series.
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